Kieran Michael Bourne & Anor v Manuk Manukyan & Anor

A company director must account for company payments once the liquidator proves that the payments were made. The absence of a satisfactory explanation may support liability, but it does not automatically establish misfeasance where the wider evidence shows good faith and proper company purposes.

Payments to discharge a company debt are not transactions at an undervalue because the company receives value. A preference requires a payment to a creditor which improves that creditor’s position on an insolvent liquidation, together with a desire to produce that effect. Where the creditor is connected with the company, that desire is presumed.

Distributions require sufficient distributable profits and properly prepared relevant accounts. A shareholder who knowingly receives an unlawful distribution must repay it.

The liquidator and the company applied for relief against the former director and former company secretary of a company in compulsory liquidation.

The claims concerned a dividend declared after presentation of a winding-up petition, withdrawals and payments from the company’s bank account, alleged transactions at an undervalue, misfeasance, and alleged preferences in favour of the former company secretary. The company was insolvent from at least August 2017. The central issues were whether the payments were properly explained, whether value was received, and whether repayments to the former secretary were influenced by the requisite desire under the preference provisions.

1. Relief against the former director. Judgment was entered for the applicants in respect of the £10,000 June 2018 dividend, the cash payments of £7,100, miscellaneous payments of £20,880, an unexplained card payment of £480, and London payments of £36,564.35, totalling £75,024.35.
2. Under Insolvency Act 1986, s.212, proof that company money was paid or withdrawn places the evidential burden on the director to explain the transaction and account for his dealings with company property. The absence of an adequate explanation does not invariably establish liability, but here the director’s inconsistent evidence and failure to provide supporting records meant that he had not shown proper company purposes.
3. The court declined to determine the claims under s.238 in respect of the unexplained payments. It was preferable to determine liability by misfeasance. The card payments used to discharge debts owed to accommodation providers were made for value and were therefore not transactions at an undervalue.
4. The company was insolvent from at least 14 August 2017. Its low-margin business, severe cash-flow difficulties, minimal net assets, increasing debt to its principal creditor, family borrowing, use of store cards, and unexplained expenditure supported that conclusion.
5. The June 2018 dividend was unlawful. The company lacked sufficient distributable profits and relevant accounts, and the payment was void under s.127 of the Insolvency Act 1986 after commencement of the winding up. The director was liable to repay it under the Companies Act 2006.
6. Relief against the former secretary. Judgment was entered under s.239 of the Insolvency Act 1986 for £8,996.40, comprising payments shown to have benefited her. The connected-person presumption applied. She provided no evidence to rebut the presumption that the company was influenced by a desire to improve her position in an insolvent liquidation.
7. The claim concerning property payments was rejected. Although the company was insolvent, the case was insufficiently pleaded and evidenced, and the court could not fairly determine breach of duty or loss.
8. The precise form of order, interest and costs were adjourned for further submissions.

First-instance decision. No appellate history was stated in the judgment.